Redfin raises $12 million, eyes D.C., Chicago and Sacramento

Redfin has raised an additional $12 million in venture funding, money that the Seattle discount real estate broker will use to enhance its Web site and expand into new markets.

First up for Redfin are the Washington D.C and Baltimore areas, which are being unveiled today. Next on the agenda are Sacramento and Chicago, which the company hopes to open later this year. Redfin, which refunds two thirds of its commission to home buyers and offers a flat listing fee of $3,000 to sellers, already operates in Seattle, San Francisco, Boston, San Diego, Orange County and Los Angeles. Since its launch 17 months ago, more than 500 homes — valued at more than $350 million — have been bought and sold through Redfin.

Redfin CEO Kelman

Redfin Chief Executive Glenn Kelman is pinpointing other markets in an effort to reach profitability, adding that the 75-person company should break even once it has established itself in 10 major cities. Redfin is already profitable in Seattle, with San Francisco, Boston and southern California also reaching the milestone during select months. Kelman estimates that it will take the company about six months to reach profitability in each new market.

“We don’t think we are going to raise another round, unless we screw up,” said Kelman. “This is the amount of money that we felt we needed to safely get to profitability without having to go back to the bank.”

The new round of capital is being led by Silicon Valley powerhouse Draper Fisher Jurvetson, an early investor in Skype, Hotmail and Overture that passed on Redfin’s $8 million venture round last year. This time, DFJ’s Emily Melton — who is joining Redfin’s board — didn’t want the deal to slip by.

“It was a great opportunity for us to work with Glenn and to also work with a model that really seemed to be humming,” said Melton, who didn’t invest last year because of uncertainty over whether Kelman — at the time an interim CEO — would stay on full time. Now, with Kelman rooted firmly in place, Melton said that the firm is thrilled to be investing in a business that will “make consumers’ lives better.”

Furthermore, since Melton had an early look into the business last year, she was able to better analyze how Redfin was doing this time around. She said Kelman has “over delivered,” generating more revenue on less capital than originally projected.

“That is always good to see,” she said. Plenty of competition exists, including discounters such as ZipRealty and BuySide Realty. But Melton believes it is such a big opportunity that there is room for Redfin and others to “see some really interesting returns in this market.”

While Redfin has ambitions to bring its discount real estate model to major cities throughout the U.S., there are 12 states — Oregon, New Jersey and Tennessee for example — where real estate rebates are not legal. Despite that challenge, Kelman said the business is still looking at ways to expand into Portland.

“I don’t pretend that the political fight is over yet,” he said. “In every state capitol there is some kind of bill about who can provide real estate services and who can’t. That is just a battleground for the lobbyists that we really don’t have the money to get involved with.”

For those states where Redfin can legally operate, the expansion costs are minimal. Launching a new market — including setting up distribution deals with local multiple listing services and hiring staff — costs slightly more than $50,000, Kelman said.

Because of that, he said most of the money from the latest venture round will be used to hire developers and engineers. One area which Redfin will focus on is the slow download speeds of its Web pages. It also plans to add more community and social networking features, following up on its announcement of online forums earlier this month.

In addition to the technical enhancements, Kelman said the company must try to keep up with growth. In mid June, following a profile of Redfin on the CBS news program “60 Minutes,” the company decided to stop taking for sale listings for 25 days because of an inability to meet customer service levels.

“The key challenge in our business model is how it scales. It is not like Google where we just run an ad. We actually have to serve the client and that creates a challenge for us,” Kelman said. “We are always hustling our tails off to try to keep up with all of the customers across the U.S.”

In addition to DFJ, existing investors Madrona Venture Group, Vulcan Capital, The Hillman Company and BEV Capital participated in the oversubscribed round.